But surely, just as we encumber future generations with debt, so equally do we endow future generations with assets. And what is wrong with that?
If a bank clerk counting bank notes in the £millions, or a printer printing them, were to take just a few of the notes as they pass by, just 0.001% say, would that be acceptable? On the grounds that it is a negligible amount, just like a rounding error?
I personally fear unmanageable debt like bollock cancer, and have worked long and hard to avoid it! HOWEVER I would never get smug about it, I don't have the same personal pressures, such as 3 nasty little kids and a needy wife, like many chaps do. In their shoes it must be damn nearly unavoidable!
It depends upon whether the debt goes to fund capex or opex. In addition an asset has a value assigned by the market, and it can go up or down, whereas a debt is real. This idea that it is a zero sum game only applies to the upfront financial transaction, which is a small part of economic activity. Collateralisation of debt has become a high stakes game of pass the parcel with real winners and losers played by people who rig markets.
Regardless of what government debt goes to fund, the gilt (or whatever) which was issued to fund the debt becomes an asset, does it not, which is held by somebody thereafter. And just as the debts are passed on to our successors, so are the financial assets - in addition, of course, to whatever physical assets may result from capex. The values of both debts and assets go up and down, do they not, depending on inflation/deflation levels.
Value, as they say, is a matter of opinion whereas debt isreal, which is made more complex by inflation or deflation, but surely that initself destroys the zero sum game argument ? When debt was used to fund investment, which fuelled growth,then everyone was a winner but now debt is a commodity to be traded like anyother, the link between a debt and something tangible has been broken. The massive increase in debt in the latter stages of the 20[SUP]th[/SUP]century was used to fund consumption, there is no physical asset or collateral,there is only a debt on future generations who are slaves to that debt.
Debt is a bet on the future. Do you feel lucky, punk? You have the thing now, you pay for it with what you hope you will have in the future. If the debt is a real asset, like a house, it is barely a debt. Indeed, buying a house can bring great leverage: You buy a £500k house with £100k of your money and £400k of the bank's. The house increases in value to £600k. You still owe the bank £400k, but now you've just doubled your own £100k. Result. Yes, negative equity is when this little scam doesn't work out. But when you buy a car or a bike or a 3 piece suite, you've borrowed cash which you can't repay by liquidating the asset. So you have to be pretty sure that you'll still be in a job in the future, or your business doesn't suffer difficulties. I don't like living like that which is why, apart from a mortgage, I don't owe anyone a bean. Economically, life has been a bit tough over the last few years, but I have massively reduced outgoings (with no really harsh happiness consequences). If I'd had a lot of debt to worry about, the situation might have been very different. Debt is a necessary evil. But the future is ever more uncertain and unknowable. I don't like taking big bets on it - when the risk factor is so high. You also have to worry about your old age. As you service debt, you're not saving. You are likely to live longer and longer. And on what? An old age pension? You're only going to earn so much money in your life. You have to give some thought for how many years it's got to last you.
i cant stand the stress of bank loans and all the rest of it. also for me, i would get no pleasure from 'owning' a car, bike or whatever if i had to pay for it monthly..im not interested in having the latest and greatest anyway. if i cant afford something i really must hvae it, i just think about what have i got to do to be able to afford it? How can i earn the money? Although a house is considered an asset, it is really another burden until is paid off...true, a house is usually an appreciating purchase, unlike a car or boat, but it is still another financial burden until one is mortgage free, and as Banks are such scum, they always load the interest at the front of a mortgage, so over a 25 year loan, the actual borrowing isnt even chipped into for about 15 years. my only debts are my mortgage and student loan (which will probably never be paid off)...
As one contemplating an early retirement on a significantly reduced income I find this reassuring. Yep. Once my daughter finishes her Masters.
Pete. Credit helped fuel the industrial revolution and the economic expansion that gave us the standard of living we all enjoy today. But debt has become a cancer that risks destroying that prosperity for all but the elite.
Sorry, but you seem remarkably resistant to acknowledging the concept of credits and debits at a macro level. You say "there is only a debt on future generations" but that is not quite correct, is it? Each pound of debt is also a pound of asset to somebody else. If I have some money in a bank, that is a debt for the bank and an asset for me. If a pension fund holds government bonds, they represent a debt for the government and an asset for the pensioners. Future generations will inherit debts, to be sure, and they will also inherit corresponding financial assets equal to those debts, as well as some physical assets. You may well be right if you say that the markets in financial instruments have become too large and too artificial, several times larger than the markets in physical things. I agree with you - but discussion of that issue is not helped by introducing misapprehensions about what debt means at a macro level.
Pete, Agreed on assets and liabilities, but the "value" of this asset (or bond in this instance) is the entitlement to a string of future interest payments together with a repayment of the principal. The liability is upon the govt to service and repay. In the case that the bond is serviced and repaid in full (and not devalued by inflation) then the "value" of the asset and the liability is the same, and the balance sheet position is correct as you suggest. The issue here is the fact that the total balance sheet of both "assets" and "liabilities" has become too large in total as people have been "capitalising" their current expenditure or opex. There is no corresponding real asset to match, it has (to large but not exclusive) extent been consumed. The larger balance sheet of both bond "assets" and future payment "liabilities" needs to be written down. This can be done by a real default, or a long period of deflation of the debt (or inflation caused by printing more money without corresponding increase in collateral) - which is just default over a longer time period. But the liabilities (or debt service and future redemption) are too large. They need to be written down ideally - which would suddenly write down the corresponding value of these purely financial assets. However, these financial assets are what comprises the pension funds and savings of most of the population. People (especially those in or near retirement) would be plunged into penury. But there is no longer any sensible chance of repayment of total govt liabilities, only that the servicing of interest remains manageable (just) as long as each debt can be rolled over (depending on govt maintaining creditworthyness). So, the govt debt service is identical to an "interest only" mortgage. The assets are overstated. They need devaluing to allow the real value of the liabilities to be reduced. But inflation and corresponding reduction of the debt, which is a net transfer from savers to overspenders, is the only politically manageable route to doing so. The other options are not attractive.....
Thank you Cham. That is admirably clear and to the point. Couldn't have put it better myself. You are obviously in the right job.
So we are left to try and manage a mess created by governments (Gordon Brown) consistently overspending and the best we can hope for is that savers are screwed and the whole lot doesn't come crashing down around our ears. Great. Shotgun shells and baked beans anyone ?
A bit of a simplification to blame it all on Gordon Brown, isn't it? It's not as if UK plc was all tickety boo in the last few decades. He may not have helped, but he didn't start consumption being fuelled by debt. May I make it plain that I have no particular love for Brown. I just don't like to see a good argument undermined by a suggestion that you can find one guy to blame.
